Clawing Back Executive Compensation

57 Pages Posted: 2 Sep 2012 Last revised: 23 Jan 2013

James S. Ang

Florida State University; Florida State University - College of Law

Yingmei Cheng

Florida State University - College of Business

Sarah Fulmer

Florida State University - Department of Finance

Date Written: January 2013

Abstract

We explore whether clawback provisions (i.e. Dodd-Frank and SOX) can mitigate agency problems by deterring the executives from manipulating earnings in an effort to boost their incentive compensation. We estimate the direct and indirect gains executives receive as a result of manipulating earnings and compare the amount potentially recoverable under each clawback provision. We show that the Dodd-Frank Clawback can potentially recover a large portion of the direct gains from misreporting (i.e., “excess incentive compensation” as defined by Dodd-Frank); however, significantly larger indirect gains (e.g. profits from the sale of stock and option exercise, gains from delayed termination) are not subject to clawback under Dodd-Frank. Neither the Dodd Frank nor the SOX clawback provision captures the benefits CEOs obtain from delayed termination. Our results suggest existing clawback legislation may not be sufficient to reduce agency problems and curb earnings manipulations.

Keywords: Dodd-Frank, Clawback, Executive Compensation

JEL Classification: G38, K2, K4

Suggested Citation

Ang , James S. and Cheng, Yingmei and Fulmer, Sarah, Clawing Back Executive Compensation (January 2013). Midwest Finance Association 2013 Annual Meeting Paper. Available at SSRN: https://ssrn.com/abstract=2139818 or http://dx.doi.org/10.2139/ssrn.2139818

James S. Ang

Florida State University ( email )

College of Business
Tallahassee, FL 32306-1042
United States
904-644-8208 (Phone)

Florida State University - College of Law ( email )

425 W. Jefferson Street
Tallahassee, FL 32306
United States

Yingmei Cheng

Florida State University - College of Business ( email )

423 Rovetta Business Building
Tallahassee, FL 32306-1110
United States
850-644-7869 (Phone)

Sarah Fulmer (Contact Author)

Florida State University - Department of Finance ( email )

Tallahassee, FL 32306-1042
United States

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